Many consumers that purchase a home borrow funds from a lender (e.g., banks, thrifts, mortgage companies, credit unions, and online lenders) and grant the lender a security interest in the home. The legal document whereby the consumer uses the property as collateral for repayment of the loan is commonly known as a mortgage or mortgage loan. Lenders sell many of the mortgage loans that they originate into a secondary mortgage market. The Federal Home Loan Mortgage Corporation (Freddie Mac), the Federal National Mortgage Association (Fannie Mae), the Government National Mortgage Association (Ginnie Mae), and Wall Street investment institutions (private label market) are participants in the secondary mortgage market. By buying mortgage loans in the secondary mortgage market, participants like Freddie Mac provide lenders with capital that allows them to meet consumer demand for additional home mortgages. The secondary market for mortgage loans renders available a supply of money for housing, thus lowering the cost of money and ultimately lowering the cost of home ownership for consumers.
In exchange for mortgage loans sold in the secondary market, the seller may either receive cash or securities. A company purchasing mortgage loans in the secondary mortgage market may generate capital by holding on to the purchased mortgage loans and keeping the funds homeowners pay for their mortgage (e.g., principal and interest). A company may also generate capital by pooling (e.g., bundling together into large groups) the purchased mortgage loans, which may be used to back the issuance of a mortgage backed securities (MBS) that are subsequently sold on the open market to investors. An MBS represents an undivided beneficial interest in one or more pools of mortgage loans. Sometimes an MBS is referred to as a “pass-through” security, because the funds homeowners pay for their mortgage are “passed through” to the MBS investors. In general, a mortgage pool is a positively identified group of mortgage loans combined for resale to individuals or entities. The process of forming the mortgage pools and issuing an MBS is called securitization.
By guaranteeing an MBS, the guarantor assumes the credit risk of the MBS. That is, regardless of whether the borrowers repay the mortgage loans that back the MBS, the guarantor guarantees that the credit risk dependent return that is passed through the MBS will be paid to the investor in a timely manner. As a result, the primary market lenders are infused with funds from debt investors who would not otherwise invest in residential mortgages because of the financial risk. The guarantor may charge a guarantee fee (commonly referred to as a “g-fee”), typically a portion of a percentage point of the mortgage loan coupon rate, for guaranteeing the credit risk dependent return. The market determines the fair price for the g-fee associated with a pool of loans or an MBS. The fair price of the g-fee takes into account an assessment of the risks associated with the mortgage loan, often determined by market models, such as those used by rating agencies (e.g., S&P, Moody's, Fitch, and DBRS).
A company buying mortgage loans in the secondary market may buy loans through a flow process or a bulk process. In the flow process, the seller delivers to the buyer mortgage loans that are in conformance with predetermined guidelines set forth by the seller and the buyer. For example, the guidelines may require that all loans within a delivered pool of loans conform to certain characteristics, such as loan amount, payment terms, interest rate, loan term, and the like. For loans acquired through the flow process, the buyer will guarantee the loan for a predetermined g-fee, normally established through a long-term contract.
In the bulk process, the seller delivers to the buyer a loan pool that is comprised of a variety of loans and asks the buyer to quote a g-fee for this pool. Because under the bulk process some of the loans within the delivered loan pool may not conform to certain guidelines, the buyer may be unwilling to accept the credit risk associated with all the mortgage loans within the loan pool and may therefore refuse to guarantee all loans delivered in the bulk process. As a result, the seller may be forced to find another buyer who is willing to guarantee the remaining loans. To prevent this, the original buyer may agree to guarantee all loans within the bulk process, pool those loans that are deemed to have an unfavorable risk/return tradeoff, and then sell those risky loans on the secondary market. If the loans conform to certain guidelines, the original buyer may randomly determine which loans from a pool to sell and which loans to keep. Through the use of a random selection process, the resulting sub-pools of loans are likely to have substantially similar target credit risk ratings, both to each other and to that of the entire pool.
It is desirable to provide a system and method that would enable a company to guarantee more loans from a loan pool. The inventors have determined that a drawback to the random selection process described above is that it does not recognize that a company's internal value assessment (i.e., the company's view of the credit risk associated with the sub-pools) may be different than an external or market value assessment (i.e., the market view of the credit risk associated with the sub-pools). Moreover, if some of the loans do not conform to certain guidelines, the random selection process cannot be used.
The inventors determined that it would be desirable to enable a company to determine the difference between what the market would pay for a guarantee on a loan and the company's expected internal cost to guarantee the loan in order to thereby allow the company to leverage this difference and competitively bid a g-fee.